How do India’s monetary and fiscal policies respond to the relationship between household’s debt and inflation expectations in times of geo-political conflicts?

This study empirically examined how geopolitical conflicts-induced geoeconomic fragmentation influences inflation expectations-led financial behaviour of the households in India, and how monetary and fiscal actions harmoniously respond to the geopolitical conflicts-led changing financial behaviour of the households. Using 2SLS technique and trend analysis, the study finds that geopolitical conflicts, since 2021-22, have given significant rise to the household’s debt where high interest rate did not succeed to restrict households to borrow and invest in the financial market since uncertainty creates a dominant precautionary motive for saving. Besides, household’s lingering higher inflation expectation than its actual pushes them to pull forward large purchases to beat future price hikes irrespective of increase in interest rates. This paradoxically shrinks their buffer against financial shocks, lowering precautionary savings and risking longer-term economic instability. Such situational motive of households renders standard interest rate hikes largely ineffective at restricting borrowing, consumption, or physical investments.